China Revises Labor Contract Law

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Mar. 18 – China’s National People’s Congress adopted the “Decision on Revising the Labor Contract Law of the People’s Republic of China (Order No.73 of the PRC President, hereinafter referred to as the ‘Decision’)” on December 28, 2012, which tightens loopholes on hiring dispatched workers and offers better protection to the interests of such workers.

Labor dispatching is a common method used by foreign-invested enterprises in China to employ workers through labor dispatch agencies, such as FESCO or CIIC. In 2011, dispatched workers in China reached 37 million, however while these workers are supposed to enjoy the same payment as permanent employees and receive benefits from their contracting labor dispatching agency, in practice they are often underpaid and do not receive such benefits.

In response, the Decision requires employers to hire the majority of their workforce directly, and the number of contract laborers shall be strictly controlled. Moreover, it clearly states that all employers shall stick to the principle of “equal pay for equal work.”

Key revisions introduced by the Decision can be found below.

Higher Requirement for Dispatching Agencies

The Decision has raised the standards for establishing a labor dispatching agency, specifically:

  • A labor dispatching agency shall have a registered capital of no less than RMB2 million, while under the original Labor Contract Law, only RMB500,000 was required
  • A labor dispatching agency shall have a permanent business premise and facilities that are suitable to conduct its business
  • A labor dispatching agency shall have a management system on labor dispatch that is compliant with the relevant laws and administrative regulations
  • A labor dispatching agency shall satisfy other conditions as prescribed by laws and administrative regulations

Besides, for entities and individuals intending to engage in the labor dispatch business, they shall apply for an administrative license with the relevant labor administrative departments, and shall go through the corresponding company registration procedures pursuant to the law.

“Equal Pay for Equal work” Principle

The Decision clarifies that the principle of “equal pay for equal work” shall be applied to all labor dispatch agreements, meaning that the employers shall apply the same remuneration standards for dispatched employees as those for its directly-hired employees who hold similar positions.

Restrictions on Labor Dispatching Arrangements

The original Labor Contract Law provided that labor dispatch arrangements should generally be implemented for temporary, ancillary or back-up positions. The Decision has deleted the word “generally,” so labor dispatch arrangements are now only applicable to the following three types of positions.

  • Temporary positions: A position with a duration of no more than six months
  • Auxiliary position: A position that provides auxiliary services to the main or core business of the employer
  • Back-up position: A position that can be performed by a dispatched employee in place of a permanent employee during the period when such employee is away from work for study, vacation or other reasons

In addition, the employer shall ensure that the total number of dispatched workers does not exceed a certain percentage of the total number of its employees (actual percentage shall be prescribed by the labor administration department of the State Council).

Harsher Punishment

The Decision has imposed heavier penalties for breach of Labor Contract Law, specifically:

For entities providing labor dispatch services without a license, the labor authorities may confiscate all illegal gains and impose a fine of no less than one time, but not more than five times, the illegal gains on such entities. Where there are no illegal gains, a fine of no more than RMB50,000 may be imposed.

For employers and dispatching agencies violating the law, if they fail to correct the violations within the time period specified by the relevant labor bureau, they may be fined between RMB5,000 and RMB10,000 per dispatched employee, and labor dispatching agencies may get their business licenses revoked.

Application of the Decision

The Decision is scheduled to take effect on July 1, 2013.

For labor contracts and labor dispatching agreements lawfully entered into prior to the release of the Decision (December 28, 2012), such contracts and agreements shall continue to be performed until their dates of expiration, but any provisions that are in violation of  the “equal pay for equal work” principle must be modified.

For entities engaged in the labor dispatching business prior to the effective date of this Decision, they are allowed to take up new labor dispatching business only if they obtain the administrative license and change the company registration pursuant to the law within one year after the implementation of the Decision.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

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